Wednesday, 20 January 2016

We’ve just had the
latest official UK jobs market figures from the Office for National Statistics.
This is the first set of 2016, though the data mostly cover the three months September
to November of last year. And the picture is broadly in line with the recent
trend.

Employment continues
to very grow strongly, with 267,000 (+0.9%) more people in work compared with
the previous quarter. Employees account for 60% of the latest quarterly
increase, full-time employees for 42%. The overall rise takes the total number
of people in work to 31.39 million, lifting the working age employment rate to
74%, higher than at any time since comparable records began in 1971. Unemployment
meanwhile is down 99,000 on the previous quarter, to 1.675 million, alongside a
fall of 93,000 (to 8.92 million) in the number of economically inactive people of
working age.

The unemployment
rate (5.1%) is now lower than at any time for a decade but still not triggering
higher wage pressure. Indeed the rate of annual nominal pay growth has slowed
again (down to 1.9% excluding bonuses, which is the best measure of underlying
pay pressure). This suggests that the rate of unemployment consistent with the Bank
of England’s 2% inflation target has fallen significantly over time; a generation
ago most economists reckoned this so-called sustainable unemployment rate was
around 10%. Consequently we need to rethink what we mean by a ‘tight labour
market’.

Some commentators continue
to talk as if the labour market is already very tight, citing indicators such
as unfilled job vacancies (currently standing at around 750,000) and employers’
reports of mounting skills shortages. The implication is that the Bank of England
ought to be considering raising interest rates sooner rather than later, notwithstanding
caution induced by the state of the global economy as highlighted only
yesterday by the Bank’s at present dovish Governor Mark Carney. But the pay
data simply don’t support a hawkish view. Unemployment may now have to fall to
a very low rate, perhaps below 4%, before we see strong upward pressure on pay.
For the time being the labour market isn’t tight, just recovering. Monetary
policy should support this not stymie it.